You contribute to your 401(k) and maybe even to an IRA. So what's next? Here's 3 steps to take to start investing in non-retirement accounts.
You know you need to save for your future. You contribute to your 401(k) and get the matching contribution, too. You might even add some money to an IRA on your own.
Sound like you? If so, you might be wondering what's next. After all, you likely have more goals than simply “retire at some point.” And if you're a motivated professional, you're likely ambitious and interested in knowing how to start growing wealth for yourself.
Still nodding along? Then consider taking these 3 steps to get started.
Step 1: Know Your Why, and Your Investing Time Horizon
Why do you want to invest in the first place? In other words, what's your goal? What do you want to have in the future?
In some cases, the answer might simply be “more money.” While a tangible, specific goal is always good, you don't necessarily need one to start investing in non-retirement accounts. This is especially true if the genereal aim is to simply grow wealth. I call this a “wealth-building account” when I work with clients who want to increase their net worth but don't have a specific goal for that wealth yet.
While growing wealth is an ambiguous, intangible goal, it does tell you something about why you want to invest. You probably won't touch (or need) that money for years, maybe even decades. With other goals, like buying a home or starting a business, you know you need a specific amount of money in a much shorter period of time.
Knowing the timeline for your goal will help you determine where and how to invest. If your goal requires you to be able to use the money you invest in 5 years or less, you might want to put that cash in a safer place than the market. A high-yield savings account, CD, or money market account may make more sense because these often pose less risk.
Over time, the market does tend to provide healthy returns for investors. But the key phrase is over time. When you invest in non-retirement accounts, plan to leave that money in place for at least 5 years to give it a chance to ride out the inevitable swings and volatility that naturally occur in a healthy financial market.
Step 2: Know Yourself, and How Much Risk You Can Handle
Once you understand why you're investing, you can make the right choices around other important investing decisions like creating the proper asset allocation based on your risk tolerance. Risk tolerance is your ability to withstand losses within your investment portfolio without panicking and acting on irrational, emotional impulses.
Can you sit and do nothing to ride out market fluctuations when everyone else is in a tizzy? Or do you know you can't stand seeing lots of red in your portfolio, even when you won't touch the money for years? Whatever your risk tolerance is, you can adjust your asset allocation—or how much you're invested in different securities, like stocks and bonds—to match it.
The tricky thing, though, is that we're bad judges of our own risk tolerance because we're subjective, not objective. Working with a financial planner or using a robo-advisor to get started are good solutions. In either case, you can take a risk assessment questionnaire that gives a third-party an objective look at your real appetite for risk so they can suggest an appropriate asset allocation and overall investment strategy for you.
Step 3: Decide How Much Support You Need
Speaking of advisors of both the human and robo variety, the next step is to understand how much support you'd like to have as you get started with investing outside of retirement accounts. Ask yourself—and honestly answer—questions like:
- How much do you know about investments?
- How complex is your financial life?
- How confident are you?
- How much do you second-guess your own decisions?
Your answers will help reveal the best place for you to get started. If you're fairly confident, have a straightforward set of goals and little complication in your personal finances, and don't need personalized service, opening a taxable brokerage account with a robo-advisor might be a great place for you to begin investing on your own.
A robo-advisor, like Betterment, Wealthfront, Ellevest, or another robo advisor that you feel comfortable with, will allow you to open a brokerage account extremely quickly, even if your starting investment balance is $0. They'll automatically adjust your asset allocation as needed, and perform other important activities like rebalancing and tax-loss harvesting. All you need to do is make regular contributions to the account.
But there are some pretty big potential pitfalls in going this DIY route (even with the support of a robo). You don't get to develop a one-on-one relationship with someone who deeply understands you and what matters most in order to create a specific investment strategy that fits within the context of your full financial life. And if the market crashes and you start to panic or second-guess what you should do with your money? Sorry, but there's no one there to reassure you—or stop you from making big, costly mistakes.
That's why you might want to work with a human financial advisor to make sure you keep your investments on the right track for the long haul. There are some great options for advisors who help beginner investors. Look to the XY Planning Network for a slew of planners who are fee-only advisors who don't have asset minimums (i.e., require you have a certain amount of money to invest). NAPFA is another good organization to aid in your search.
Ultimately, what's right for you depends on your needs, goals, and preferences. Both robo-advisors and fee-only advisors can help you invest in non-retirement accounts. There's no one right answer, beyond this one: just get started. Time is your biggest advantage, so don't waste another day!